Fed’s Musalem Says There Is Limited Room for More Rate Cuts

St. Louis Fed President Alberto Musalem.

(Bloomberg) -- Federal Reserve Bank of St. Louis President Alberto Musalem said he supported last week’s interest-rate reduction as a way to take out insurance against a weakening labor market, but sees limited room for more cuts amid elevated inflation.

Musalem said interest rates are now “between modestly restrictive and neutral.” He said he would support further reductions if the labor market worsens further, but emphasized the importance of keeping long-run inflation expectations stable.

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“I supported the 25-basis-point reduction in the FOMC’s policy rate last week as a precautionary move intended to support the labor market at full employment and against further weakening,” Musalem said Monday in remarks prepared for an event in Washington hosted by the Brookings Institution. “However, I believe there is limited room for easing further without policy becoming overly accommodative.”

The US central bank’s rate-setting Federal Open Market Committee lowered borrowing costs last week for the first time in 2025, but projections released after the gathering showed policymakers have differing views over how much more easing is appropriate in the months ahead. Seven policymakers did not pencil in any more cuts for this year, while 10 saw at least another half-point of rate reductions by December. Two officials projected one more quarter-point rate cut.

Musalem said recent data show the downside risks to employment have risen, but added that he still sees a risk inflation could remain above the Fed’s 2% target. The St. Louis Fed chief said booming stock markets and low credit spreads continue to support the economy.

In that context, he said policymakers should move carefully because rates are close to neutral — the level that neither boosts nor slows growth — after adjusting for inflation.

“Should further signs of labor market weakness emerge, I would support additional reductions in the policy rate, provided the risk of above-target inflation persistence has not increased and longer-term inflation expectations remain anchored,” said Musalem.

He also said that while the impact of tariffs on prices has so far been less than expected, other factors seem to be contributing to above-target inflation.

“Monetary policy should continue to lean against persistence in above-target inflation, whether it materializes from the impact of tariffs, lower labor supply growth, or for other reasons,” he said.

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Taking questions after his remarks, Musalem reiterated that he expects the price effects from tariffs to fade in the next two to three quarters, but said officials need to stay on guard against second-round effects and the threat of persistent inflation. Musalem, who votes on rate decisions this year, said he was approaching policy moves on a meeting-by-meeting basis.

Atlanta Fed President Raphael Bostic said in a separate interview published Monday that he was comfortable with last week’s rate cut but sees little need for further easing this year. Bostic said he penciled in only one rate cut for this year in his economic projections, in line with what he anticipated in June.

“I am concerned about the inflation that has been too high for a long time,” Bostic, who does not vote on policy this year, told the Wall Street Journal. “And so I today would not be moving or in favor of it, but we’ll see what happens.”

--With assistance from Amara Omeokwe.

(Updates with additional Musalem and Bostic comments beginning in tenth paragraph.)

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